Why is there a real estate crisis unfolding in China?

The real estate sector in China is suffering from a debt problem. Big real estate developers like the embattled Evergrande have accumulated massive amounts of debt, which has brought construction to a halt and lots of angry homebuyers.

Amid the turmoil, buyers across China banded together and threatened to stop paying mortgages on more than three hundred unfinished housing projects. The Chinese government could unleash bailout funding worth up to $148 billion aimed at allowing developers to finish their buildings. David Branchio, presenter of Marketplace Morning Report, joins Jennifer Buck, China Marketplace correspondent, for an update on the crisis.

Here is an edited version of their conversation:

David Brancaccio: So what is this about unfinished housing? What is just sitting there? If you see one of these piling and maybe piles of cinder block and cranes kind of sit there?

Jennifer Buck: Yes, exactly. And part of the reason they’ve stopped is because of the COVID closures. But mainly because the real estate developers ran out of money. You may have heard of Evergrande. So they would go to smaller areas, pay higher dollars for the land, and then sell the apartment projects before they were built. They usually collect large upfront payments, usually 30%. But sometimes we heard 50%, and then they use this money to build apartments. And almost all developers have done so. At the same time. They also got cheap loans. And so they started investing in areas in which they had no experience. For example, Evergrande started filling water, electric cars, and even bought a football team.

Brancaccio: And these cheap loans, began to dry up.

Buck: Yes, exactly. Chinese regulators were very concerned about this reckless spending. So they cut off access to easy credit. Then the Chinese economy began to slow down. So investors are starting to look seriously at these apartments, are they really worth the price they were paying? So home sales are also down. So the developers ran out of cash. That’s when global investors got really worried.

Brancaccio: Why do I mean other than human interest in others? I mean, I understand that US investors in general are not that deep in the real estate market in China.

Buck: you are right. But real estate is a huge part of China’s economy, and the Chinese economy is connected to the rest of the world. So if Evergrande and other developers don’t pay their suppliers or construction workers, and those people in turn don’t pay their bills, layoffs have begun. It’s a real snowball effect. And in the end, you get the feeling that Chinese officials in the US don’t really want more home buyers to join this boycott, so they censor the news. It was really hard to assess the number of people involved.

Brancaccio: There is a distinction of some sort here. Protesting homeowners are not defaulting on their loans, but they are threatening to boycott the payment of their mortgages. What is the difference?

Buck: Yes, well, in China, if you don’t pay your debts, it can put you on a so-called defeat list, which will make your life miserable. And secondly, home buyers, they still want these apartments. As if you are a man, you need a dwelling to be considered material for marriage. You need housing to get your child into a good school. And if you belong to the middle class, of which there are many, real estate is still really the only form of investment available to you. So threatening not to pay mortgages is really a way to get the government’s attention rather than default.

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